The panelists mostly agreed that the high-profile Facebook IPO debacle has cooled excitement for IPOs, at least within those private companies considering monetization.

Mr. Zwilling gave a brief summary.  He thinks many entrepreneurs are now saying, “I want nothing to do with this,” referring to the IPO process.  Zwilling noted, for example, Zuckerberg’s widespread criticism following the offering; he said many entrepreneurs are concerned that going public would risk losing control over important cultural aspects of his or her company.

Related to Facebook’s volatile early pricing experience, Professor Dibadj asked why there has not been more pressure (from entrepreneurs) to use a Dutch Auction format for pricing, instead of relying on the “black box” of underwriting?  Zwilling proffered that many entrepreneurs are simply naïve to the pricing system, and they don’t have much insight as to the underwriting process.  The entrepreneurs, by and large, think, “We don’t know how it works and we don’t have any control.”

Is the IPO market depressed because M&A is becoming the preferred exit strategy for entrepreneurs?

Martin Zwilling opened by commenting that entrepreneurs today prefer M&A, because private acquisition is not as burdensome or costly as preparing for an IPO.  In addition, many startups have recently seen “huge premiums” paid via M&A, so their bottom-line return might approximate that generated by an IPO.  Mr. Zwilling also noted that many companies, including Intel and IBM, are beginning to look to buy their technology instead of creating it on their own—essentially outsourcing some of their product development.

Entrepreneurs prefer M&A’s speed, which allows them to ‘cash out’ and move on to creating a new company—what entrepreneurs love to do in the first place.

Professor Bartlett agreed with Mr. Zwilling, but argued that the dynamic has been in place for a long time.  Still, he acknowledged that M&A is preferred for many startups because entrepreneurs and VCs can monetize their investments immediately, whereas the IPO process locks up capital for six months and subject them to considerable market risk.  Even once the company has gone public, both are often prevented from quickly selling their equities because they’re considered ‘insiders.’  Prof. Bartlett concluded, “The thumb has always been on the scale, in my assessment, on the side of M&A” because VCs simply have more control over the process.

Professor Dibadj suggested that entrepreneurs might have become a bit more sensitive to the substantial underwriting costs associated with an IPO, which pushes them towards merger instead.  Marin Zwilling agreed—adding that VCs prefer business models with M&A exit strategies than IPOs.

This morning’s first panel features Robert Bartlett, Reza Dibadj, and Martin Zwilling, discussing the JOBS Act’s Title I provisions for initial public offerings.

Professor Bartlett began with the political economy surrounding the legislation.  He noted the interaction between initial public offerings (“IPO”) and a well-functioning venture capital (“VC”) ecosystem.  Without accessible IPO requirements or other sources of secondary financing, many VCs may be unable to recover their invested capital or exit the market.  But when companies can sell equity to the public, VCs can recycle the capital—the VC ecosystem can then support more growing companies and, in turn, job creation.

Title I of the JOBS Act emerged out of an industry task force’s white paper, entitled “Rebuilding the IPO On-Ramp.”  It recommended an on-ramp for emerging growth companies (“EGCs”) using existing principles of scaled regulation.  The central principle was to lessen the regulatory and disclosure requirements for new companies – encouraging them to go public – by creating a new EGC category.  The transitional category that emerged applied generally to companies with less than $1 billion in annual revenue, for as long as five years.

Congress acted quickly, adopting most of the white paper’s recommendations.

EGCs are subjected to less cumbersome regulation while on the ‘on-ramp.’  For example, they need only include two years’ of audited financials in their regulatory statements (instead of three to five years).  Also, Title I allows EGCs and underwriters to communicate with qualified institutional buyers prior to filing regulatory statements; and companies considering an IPO can file a confidential registration statement, to protect sensitive information if they decide not to go public at that time.